It has been quite an eventful week between Scotland’s battle over independence, the Federal Reserve’s FOMC announcement and the markets making new all time highs.
For Scotland, the decision came down to the benefits of maintaining their unity with the United Kingdom. While William Wallace may not have agreed, the vote to remain part of the U.K., which can not happen again for a generation, removed a potential stumbling block for the markets globally.Â
The FOMC announcement was more comedy than anything else as the continued facade of the Fed’s forecasting capabilities was revealed. However, the reiteration of the Fed’s commitment to “remain accommodative” for as long as necessary gave comfort to traders that while the “punch bowl” was no longer being refilled, it was not being taken away either.
However, one announcement from the Fed that did not get a lot of media attention was their new policy to “reduce” the size of the Fed’s balance sheet. The general plan is as follows:
- Determine timing and pace of normalization
- Reduce securities holdings and maintain low interest rates
- Gradually reduce the reinvestment of principal repayments
- Sell mortgage-backed bonds if warranted.
- Reduce balance sheet over the longer term to only the size needed to implement policy.
These actions will be taken in conjunction with the Federal Reserve’s attempt to normalize interest rate policy.
Importantly, these combined actions constitute the removal of the “punch bowl.” While I suspect that Janel Yellen truly believes that the economy is strong enough to support such a process, a look at Japan’s failed attempt as creating inflation, boosting economic growth and normalizing policy should give her a clue. This is a topic that I will delve into more deeply next week.
However, for this weekend’s list of “Things To Ponder” I have accumulated a few reads relating to the Fed. As always, it is important to eliminate “confirmation bias” be evaluating decisions based on a complete understanding of the argument.
